DOES ANYONE HAVE EXPERIENCE DOING DUE DILIGENCE ON ECOMMERCE COMPANIES?
I'm in LOI with an interesting eCommerce company, and I'd like to get some feedback on my due diligence process.
I now eCommerce is often outside the focus of this community, but I figured I'd ask anyways.
thanks!
I would reach out to Centurica. They have a great reputation when it comes to e-commerce DD.
https://www.centurica.com
E-commerce is tricky for due diligence. You have to know how you can get screwed - there are dozens of ways I can think of that a potential seller can inflate profits or traffic that can just disappear after close. There are almost certainly dozens more I have not yet encountered. They can hide marketing dollars spent in a different account greatly inflating profits, They can drive traffic via email or social media giveaways that is not replicatable and looks "natural". Rankings can change on a dime for no real reason or on a mop up of undesirable activities by Amazon, Google, Facebook etc. If you dont know how the traffic was generated in the first place the business can be dead literally overnight.
You need to have a very strong understanding of where traffic is coming from, what is driving that traffic, how much it costs, what it is reliant on, how solid those sources are and how you can replicate, strengthen or replace them.
Too many e-commerce businesses market themselves as turnkey when they really are very reliant on a specific knowledge set or are built on the back of non-repeatable and non-scalable black hat techniques. And those are the good ones.
While there are some great businesses in this space, one of the reasons they trade so cheaply is because they are inherently very risky. If you found a stock that was paying a 30% dividend you would be very concerned that you might lose your entire investment? That is basically what an e-commerce company trading at a 3.3 multiple is and thus should be approached not as a great deal but as a chance to totally get wiped out...
I have 15 years experience in the industry have grown 2 businesses in the space by more than $100 million each. I know the levers to pull, have relationships with top-notch professionals, and know where the many pitfalls lie and I am still very cautious when approaching these businesses because the vast majority are much riskier than they appear at a quick glance.
Someone without experience is probably betting on getting lucky.